Banking on nuclear

18 August 2014

The nuclear industry needs to satisfy the multi-criteria approach to risk that banks take when they decide whether to invest in a large infrastructure project. Only then, can it expect to attract this form of financing to nuclear new build projects, writes Ron Cameron.

Specifically, banks look for long-term certainty on price, stable government policy, industry reputation, regulatory certainty, the process for addressing planning and environmental issues and public acceptance, in addition to the economics of the project.

European wholesale electricity markets are currently not favourable to nuclear power, however. That's because the role of nuclear in offsetting the negative effect on price of feed-in tariffs and grid priorities for renewable forms of energy is not adequately recognised. The cost to the system of having intermittency of supply is often borne by the nuclear plants through their role in providing back-up generating capacity or otherwise by the consumer through higher electricity prices, subsidies or taxes. With no level playing field for nuclear in liberalised electricity markets, there is a real difficulty in seeing where nuclear new build is going to come from in Europe, without government action. We need to explicitly recognise the advantages that nuclear power provides to stabilise these markets long term, to support the move to a low carbon economy and to help with security of supply.

Through its Electricity Market Reform (EMR), the UK government is essentially agreeing to regulate a liberalised market. There is a strike price and contracts-for-difference in the EMR not only for offshore and onshore wind and solar, but also for nuclear power. And there will be a capacity market for the electricity that's left. Through these mechanisms, the UK is trying to do something about the market disadvantage which is keeping investors away from nuclear. If there is no opposition from the European Commission and these structures are proven to work, potential investors will be able to expect certainty of a return. Fortunately, the UK's market mechanism policy has cross-party support; since without a supportive energy policy, it's very unlikely that a bank will come in and fund a project knowing that the next government might change that agreement.

Other countries, too, are making clear that the State is behind nuclear new build. For example, in the US, new nuclear power plants are being built with loan guarantees and tax credits. These enable the industry to build a track record of successful projects, which is really the key to attracting banks to a financing arrangement. Other mechanisms are seen in Finland - where large industrial companies are willing to join together to fund the cost of a new-build nuclear program in return for receiving electricity at cost price - and Russia, where Rosatom offers new nuclear countries build-own-operate agreements.

"Our focus should be on trying to get banks into plant life extensions."

Banks are reluctant to become involved with first-of-a-kind projects, whether that concerns a new reactor technology or a country embarking on nuclear power for the first time. Our focus then should perhaps be on trying to get banks into new projects at existing sites, such as plant life extensions. The latter is a lower risk process because the banks would be funding the cost of upgrades needed for plants whose construction costs have been essentially amortized and yet which could run for another 20 years. And there are usually no great public concerns attached to life extensions, since the plant has already operated for some time. If the banks got involved with those and became familiar with nuclear industry issues, then they could one day be willing to join a consortium in new build projects. Banks look particularly at the track record of the industries that they are working with. And of course there is always the concern of delays for them. So some certainty that the government is behind these projects and prepared to support them with some form of guarantee is important.

Regulatory certainty also affects issues of timing and risk and so there needs to be some degree of certainty on the approval processes before large investments are made. In the UK, this is being done through the Generic Design Assessment process, prior to construction, and in the US by the Combined Construction and Operating Licence process.

Banks also monitor public opinion, but even more importantly, the World Bank, Asian Development Bank and the European Investment Bank are driven by the appetite from their member countries for financing nuclear power projects. It is up to the consortia of countries that are in favour of nuclear power to have more of a say on the banks' boards.

Ron Cameron is the former head of the Nuclear Development Division of the OECD Nuclear Energy Agency. Cameron now provides consultancy advice to UK Trade & Investment (UKTI) on increasing investment in the UK.